Rational Mutual Fund and ETF Selection
Rational selection of equity and bond mutual funds and ETFs – An Overview
Given the extremely large variety and number of available fixed income and equity investment mutual funds and ETFs, investors need a rational basis to select among them. Without scientific selection criteria and a good understanding of which factors are more or less likely to increase risk-adjusted returns, investors will make erroneous decisions based on false assumptions.
Most individual investors want to select bond and equity mutual funds and exchange-traded funds (ETFs) to hold for a long duration.
Many would also like to invest additional amounts automatically into these funds over time and not to have to monitor them frequently. These investors are less concerned about short-term fluctuations than about their longer-term capital appreciation goals. In addition, of course, they hope to choose mutual funds and ETFs with exceptional performance and to avoid funds that consistently trail the pack.
Such investors want to use mutual screening or selection criteria to identify better funds and to minimize the need for frequent changes due to inferior performance. Individual investors are better served, if they understand what the scientific investment literature says about potential selection criteria.
These articles discuss valid fund screening and selection criteria:
- Avoid mutual funds and ETFs with sales commissions and 12b-1 fees
- Choose mutual funds and ETFs with lower investment management expenses
- Avoid mutual funds with higher investment portfolio turnover
- Avoid very large actively managed mutual funds
- Choose sufficiently mature mutual funds and ETFs
- Choose mutual funds with a minimum economical portfolio size
- Evaluate historical investment performance, but only after using other investment screening criteria
To implement these investment fund selection criteria, you need on-line fund screening applications supported with up-to-date data.
The Skilled Investor has also provided overviews of some investment fund screening applications and databases that are available on the web.
Many of these selection criteria are associated with investment costs, which are a dominant issue in efficient personal investment management. Click here for more articles on investment costs: Controlling Investment Costs
Tags: portfolio turnover
Personal Financial Planning
- Screening Mutual Funds On-Line with Morningstar.com (
Screening mutual funds on-line with Morningstar.com
Summary: In this article, The Skilled Investor discusses how to screen mutual funds on-line using our seven scientifically based mutual fund screening criteria. This article focuses on using the free mutual fund screener and database available at Morningstar.com.
In a previous article, The Skilled Investor has discussed minimum requirements [...])
- Earned Income Drives the Personal Finances of Most People (Do-It-Yourself Financial Planning - Earned income drives the personal finances of most people
The ability to project your various income sources automatically over your lifetime is one of the first steps in creating a useful do-it-yourself personal financial plan. Whether from wages and salary or from self-employment, personal earned income drives the lifetime finances of most [...])
- The most effective strategy to increase your mutual fund and ETF investment returns (
What is the most effective strategy you have to increase your long-term mutual fund and ETF investment returns?
Just reduce your investment fees to rock bottom and buy directly to eliminate all sales loads. This strategy is both simple and entirely within your control. You do not have to be smarter than all those other smart [...])
- Set a Minimum Portfolio Size Threshold for Mutual Funds and ETFs (
Choose mutual funds and ETFs with a minimum economical portfolio size
If you are going to invest in actively managed funds, then you should want them to have a sufficiently large asset base to fund the necessary research.
If an active fund is too small, then fund management quality can suffer or fees could grow. Index funds [...])
- Most Individual Investors Are Poor Personal Portfolio Managers (Most individual investors are poor investment portfolio managers
Investors more easily understand investment costs that are directly measurable, such as fees deducted on investment statements. However, many investors ignore or are unaware of the “opportunity costs” of their sub-optimal investment behaviors. Opportunity costs are usually much more difficult to measure directly, but these investment costs can [...])
- Schwab S&P 500 Index Fund – Select Shares (SWPPX) capture the Best +10 Fund Authority Score (
Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise, objective, and realistic summaries of mutual funds and ETFs for comparisons within [...])
- Fund Authority Scores for Stock ETFs and Mutual Funds – Historical investment performance (
Fund Authority Scores rate stock mutual funds and ETFs on the most important economic factors affecting long term diversified equity investment fund performance. This article explains how historical fund performance is calculated.
<<-- Go to Part 1
Go to Part 3 -->>
Part 1 of this article discussed direct and hidden investment costs, the most heavily weighted factors [...])
- Passive Personal Investment Strategies are More Time Efficient with Better Returns and Risk Control (
The scientific investment literature indicates that passive investment strategies usually are more time efficient, while they also increase returns and add more value to your investment portfolio.
For example, given the diversification imperative, it is highly questionable whether the vast majority of individual investors should own any common stocks or bonds directly. Instead, they can achieve [...])
- The Cost of Investment Counselors When You Pay Investment Sales Loads (How expensive is financial advisor compensation paid via sales loads?
A sales load might be the method that you prefer to compensate your broker or advisor. If your advisor is truly competent and ethical, he may be able to manage properly the inherent conflicts of interest that are associated with commissioned investment product sales. Even if [...])
- The Kind of Financial Advisor You Need (
The kind of financial advisor you need - A Tip from The Skilled Investor
Good or bad, financial advisors are expensive. If you need a financial advisor's help and you carefully select a good financial advisor, the value of the personal finance and investment advice that you receive might easily repay the advisor cost. However, bad [...])
- Pay Lower Investment Expenses To Get Higher Investment Returns (
Pay Lower Investment Expenses To Get Higher Investment Returns - Part 1
Excessive investment costs are a plague on your personal financial planning.
Excessive investment expenses are one of the most significant barriers to lifelong family financial security. While financial services industry sales people tell you that you need to pay more to get more, the correct [...])
- Vanguard Total International Stock Index Fund (VGTSX) lands a +9 Fund Authority Score (The Vanguard Total International Stock Index mutual fund is a low cost alternative for broad, passive index investing internationally. This fund is a composite of three other Vanguard international funds: the Vanguard European Stock Index Fund (55.7%), the Vanguard Pacific Stock Index Fund (24.1%), and the Vanguard Emerging Markets Stock Index Fund (20.2%). The percentages [...])
- Fund Authority Scores for Stock ETFs and Mutual Funds – Fund maturity and operating efficiency (
Fund Authority Scores rate mutual funds and ETFs on the most important economic factors affecting long term diversified stock or equity investment fund performance. This article explains the investment fund maturity and operating efficiency factors.
<<-- Go to Part 2
Parts 1 and 2 of this article discussed the first three, most heavily weighted factors used in [...])
- The John Bogle Blog and His Financial Article About ETFs (John C. Bogle's Blog and his article about ETFs
This article is a heads-up to people interested in investment blogs and personal finance blogs.
John C. Bogle, the founder of The Vanguard Group, Inc., has a blog called The Bogle eBlog. (If you are wondering about "eBlog," it is an anagram of Bogle.) Mr. Bogle just posted [...])
- Choose Lower Mutual Fund and ETF Management Fees (Choose mutual funds and ETFs with MUCH LOWER investment management expenses
Investment fund management fees can only be justified by individual investors, if higher net returns more than compensate for these fees. Sadly, this is most often not the case with actively managed equity and bond mutual funds and exchange-traded funds (ETFs). In addition, you have [...])
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